September 13, 2017

September 13, 2017

On Sunday afternoon, the futures opened to the upside and continued rallying into the evening right into Monday morning. What made it interesting to watch was the fact that the movement in the futures seemed inversely synced to the dwindling power of Hurricane Irma as it made landfall along the southern Florida coast.

What started out as a Category 5, or “CAT 5” storm, slowly began dropping to a CAT 4, then a CAT 3, CAT 2, and finally a CAT 1. The futures rallied higher with each lowering of intensity, and by Monday morning North Korea’s announcement that it would postpone/delay its scheduled September 11th missile test sent the market rocketing higher.

This sent the S&P 500 Index gapping and launching to an all-time high close in a nice trendline breakout. That move came on lighter volume, but in this market, I wouldn’t try and make too much out of that. The crowd seems to be expecting the market to pull back and correct here, something the market is always cited as being in need of, but so far it isn’t cooperating.

And so, Monday’s light volume closing high by the S&P 500 turned out to be meaningless as a bearish cue. Yesterday, the index just kept pushing higher to post an all-time high on an absolute basis. It is now pushing up to the hallowed 2500 price level, closing just 1.63 below it today.

The NASDAQ Composite Index didn’t post a new high on Monday, either on an absolute or closing basis, but it did trade slightly higher volume. It then moved higher again yesterday to match the S&P 500’s Monday closing high, but a day late. No worries, however, as the index just kept moving higher to post another all-time closing high, just missing an absolute all-time high by 65 cents.

From an index point of view, things look great! But despite the strength, the market is still difficult to play in terms of catching the best entries without chasing strength. Most of the best, lower-risk entries in individual stocks were seen on Friday, when the market was down in anticipation of Hurricane Irma barreling into Florida over the weekend.

By Monday morning most everything was gapping up. So, there is this aspect to the market whereby you must buy the weakness and then hope for the best. My problem with that is the hope part of that equation. When things get moving it helps to have enough names that you’re looking at to find a lower-risk entry possibility.

Gold finally pulled back, which is being cited as a retraction of the fear bid. However, from a purely objective, technical point of view, gold’s proxy, the SPDR Gold Shares ETF (GLD) got so extended to the upside that a sharp pullback was certainly not out of the question, and that is what we are looking at now.

In my view, the GLD may become buyable on this pullback as it approaches the prior breakout point at 123.31. Meanwhile, the pullback in gold and silver is inversely correlated to a reaction bounce in the U.S. Dollar, which posted multi-year lows last week.

The improving backdrop provided by a relatively muted Hurricane Irma and the NoKo missile-launch postponement seems to have taken some of the heat off the financials. But from a purely technical point of view, the Financial Select Sector SPDR Fund (XLF) was in a logical position for a reaction bounce after undercutting its 200-day moving last week.

This had the effect of sending J.P. Morgan (JPM) back up to its 50-day moving average, while the stronger of the big bank financials, Citigroup (C), rallied right back up through its 50-dma and into the highs of its current base. It seems to me, however, that the first way to test this rally is by shorting the XLF here while using the 50-dma as a guide for a tight stop. The same approach can be taken with JPM, which is just below its own 50-dma.

Apple (AAPL) conducted its usual new product event yesterday, introducing the iPhone 8 and an iPhone X. As dumb money leapt in to buy shares, the smart money used the rally to sell into, sending the stock back down to its 20-dema. Today the stock broke below the 20-dema and appeared to be headed for a test of its 50-day moving average. But it found support along last week’s lows and rallied just up into the 20-dema, closing just below it.

While we might consider this as a sign that the market is losing one its generals, as they say, I would point out that there have been several periods since 2009 where AAPL underperformed the market. You can read about one such period in my short-selling book, Short-Selling with the O’Neil Disciples. The flip side is that if the stock can regain the 20-dema quickly, then it may just return to business as usual. If it can’t then AAPL can serve as a short-sale target here as long as it is unable to regain its 20-dema, using the line as a guide for an upside stop.

News from China about banning gas-powered vehicles in 2040 or something like that sent Tesla (TSLA) running to the upside on a pocket pivot trendline breakout from a cup-with-handle base. The stock is now holding near the highs of the handle as it starts to build what looks like a little cup-with-handle within the handle.

TSLA is a good example of a stock that was probably best bought on Friday on the low-volume pullback to the 50-day moving average. Note, however, that the stock gapped right up to and just above the confluence of the 10-dma and 20-dema on Monday morning, making it buyable there while using the two shorter moving averages as selling guides. From here you’d prefer to buy any pullback closer to the 10-dma/20-dema confluence. But the fact is that it remains within buying range of the trendline pocket pivot breakout right here.

As the NASDAQ surges to all-time closing highs, lagging big-stock NASDAQ names have started to come back to life. Case in point is Amazon.com (AMZN), which posted a roundabout pocket pivot today on a nice increase in buying volume. This becomes actionable using the 50-dma as a tight selling guide.

Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) is rounding out the lows of a possible new base as it resembles AMZN prior to AMZN’s pocket pivot today. The stock closed just above its 50-dma today. This might be considered actionable here in anticipation of a more concerted upside move, perhaps even a pocket pivot, while using the 20-dema as a maximum downside selling guide to keep things tight.

Facebook (FB) is holding tight at its 10-dma as volume delinked to -45% below-average today. That puts it in a “voodoo” type of entry right here at the 10-dma, while using it or the 20-dema as your selling guide.

Netflix (NFLX) is finishing up the right side of a 7-8-week cup formation and is extended from any lower-risk buy point.

Nvidia (NVDA) was looking grim on Friday as it sold off down to its 50-dma on higher selling volume, but quickly found its feet and pushing back up toward its all-time highs. This could be considered buyable here using the 10-dma as a tight selling guide, but so far, the stock is just chopping around back and forth up near its highs as it continues to work on a potential new base.

Microsoft (MSFT) tucked back into its 10-dma on Friday as volume declined.

I am changing up the format for the reports slightly today as an experiment. Stocks will be discussed in note style, organized by groups. Charts will be included as necessary. I would appreciate any feedback members have on this, although the change is not that big. It is just an easier way for me to organize the material as a way of conveying it faster to members.

This works on two fronts. First, it gives me more time to run screens on report day and still meet my publishing deadline. Secondly, I know that members often don’t have a lot of time to read long-winded discussions of stocks, so by whittling it down I believe it makes it easier for members to acquire and digest the information regarding actionable set-ups for their own trading/investment decisions. Here goes.

Telecom-Related Names:

Arista Networks (ANET) is holding tight along its 10-dma and 20-dema, and looks like it’s in a lower-risk entry position here using the 20-dema as a tight selling guide.

Lumentum Holdings (LITE) initially rallied yesterday on the AAPL product news, since its VCSEL business is seen as a beneficiary of the new phones which will use things like facial recognition. It got as high as an even 60 bucks before turning tail and screaming down toward the eventual 56.20 intraday low.

A small rally into the close allowed the stock to print 57.25 at the bell and close above the confluence of its 10-dma and 20-dema. This is an interesting situation, and I was short the stock yesterday but covered on the break once the MACD on the 620 intraday chart began to get a bit stretchy on the downside.

This morning it looked like it might be a short early in the day, but you could feel a bid underneath the thing, so at that point there was nothing left to do but flip and go long. However, LITE ran into a little trouble near the 60 price level as it started to move above the 50-day line, and ended the day just above the line on average volume.

This might be a long, or it might be short, but the objective price/volume action has been inconclusive. Things did look ugly yesterday after the big-volume reversal, and today’s lower-volume rally into and just barely above the 50-day line isn’t all that convincing. Bottom line is that if you like the stock, it can be bought here using the 50-dma as a tight selling guide. If it can’t hold the line, however, it would morph into a short-sale target at that point. Play it as it lies.

Bio-Tech/Medical Names:

Alexion Pharmaceuticals (ALXN) posted a pocket pivot at its 10-dma and 20-dema yesterday on strong volume, as I noted in last night’s blog post. The most optimal spot to buy it, however, was on the pullback yesterday. Now the stock is back up near its prior highs as it posted a higher closing high.

Bioverativ (BIVV) is still skipping along its 10-dma and 20-dema as volume remains very light. This pullback today would have to be considered a lower-risk entry spot, using the prior 54 low as a reference for a maximum downside selling guide. The other way to handle this would be to expect that the stock would continue to hold near to the 10-dma. For now, allowing for more than 1-2% below the line would also be a feasible approach.

I also blogged last night on Supernus Pharmaceuticals (SUPN), but the stock is currently slightly extended, so I’d watch for pullbacks to the 10-dma as possible buying opportunities.

Vertex Pharmaceuticals (VRTX). VRTX, shown below, keeps pulling into its 20-dema on light volume, where it has so far been buyable. It then seems to pop off the line but then drifts back in as it continues to work on a little handle-like structure here.

This is buyable along the 20-dema here using it as a tight selling guide. If anything, VRTX illustrates why it’s best not to chase strength and instead lay back and wait for more opportunistic entries. Chasing strength in the stock last week would not have worked out well for over-eager buyers.

Chinese Names:

The China Three are once again looking like they could become the China Five once again. The three that were on the list as of my last report, Alibaba (BABA), Sina (SINA), and Weibo (WB), all remain extended and in need of pullbacks before they can be bought. BABA looked like it needed to build more of a base per my comments over the weekend, but simply took off for new highs today, breaking out on a pocket pivot volume signature.

Returning to the China Five is JD.com (JD), which I blogged about last night as a moving average undercut & rally (MAU&R) long set-up after it cleared the line yesterday on strong volume. Note that the stock had posted two five-day pocket pivots, one at the 10-dma, one at the 50-dma, over the prior two trading days. I like to see a cluster of five-day pockets in lieu of a single, standard ten-day pocket.

Note that JD is now coming up the right side of an Ugly Duckling pattern known as the “LUie” formation. This is where the stock fails badly, then forms an L-shaped pattern, holds tight, and then launches back above the 20-dema and/or 50-dma on volume. In this case, JD posted an undercut & rally move a little over two weeks ago, then held tight along the 10-dma, and yesterday launched above the 50-dma, where it was buyable at that point using the line as a tight selling guide. It is now extended.

JD’s action makes me wonder whether Momo (MOMO) will make a bid to return to the list as well, since it is also in an L-formation that includes a bounce off its 200-day moving average. So, the “L” here has a tumor coming out of its bottom side (ouch!). But we can extrapolate a bit further, using OWL (O’Neil Wyckoff Livermore) methods, to discern a tight flag formation that is something of a Wyckoffian Retest.

This occurs after the bounce off the 200-dma, as any low-volume pullback and retest of the 200-dma, no matter how slight, would constitute a Wyckoffian type of retest. As I wrote over the weekend, I was willing to play this however it wanted to resolve, and last night I emphasized that MOMO could pull a move like JD did yesterday.

So far, however, the stock isn’t holding at the 10-dma, and may undercut the lows of this eight-day price range. At that point I would be alert to any possible undercut & rally (U&R) move that might trigger a long entry at that point. The prior low is at 36.88, and MOMO moved closer to it today. One to watch.

Cyber-Security:

Palo Alto Networks (PANW) is still consolidating after its buyable gap-up (BGU) after earnings not quite two weeks ago. So far it has held the 142.23 intraday low of that buyable gap-up, and as the 10-dma starts to catch up to the stock, it becomes buyable right here using either the 142.23 price level or the 10-dma as a selling guide.

Semiconductors:

Broadcom (AVGO) remains a short on rallies into the 50-dma. The stock reversed back below the line yesterday to close just under the 50-dma, and today attempted to rally up to the line before turning tail and closing at a lower low.

Skyworks Solutions (SWKS) acts much more constructively here as it holds its 10-dma with volume drying up to -54% below average. This puts it in a “voodoo” entry position here using the 10-dma or 20-dema as a selling guide.

Cloud Software Names:

Salesforce.com (CRM) got hit with some selling volume today as it pushed back below its 10-dma. This looks weak, so I would expect the stock to test the 20-dema down at 94.65, at which point we can see what it looks like when it gets there and whether that represents a lower-risk entry opportunity.

ServiceNow (NOW) is sitting right at its 10-dma, but in my view, is in an odd, slightly extended position. I’d play this opportunistically by looking for a pullback to the 20-dema at 113.70 as a more opportunistic entry, should that happen.

Square (SQ) pulled into its 10-dma today, which brought it into a lower-risk entry position. By the close it was back in positive territory on a pocket pivot move. For now, however, I would continue to look for pullbacks to the 10-dma as more opportunistic, lower-risk entry points.

Tableau Software (DATA) is extended to the upside. Look for pullbacks to the 10-dma at 73.22 as lower-risk entry opportunities.

Workday (WDAY) priced a $1 billion convertible bond offering today, and the stock just churned around the top of its prior base breakout point and the 20-dema on heavy volume. The higher volume was due, of course, to the bond offering, and puts the stock in a lower-risk entry position here using the 20-dema as a tight selling guide.

Internet Related:

GrubHub (GRUB) has posted two pocket pivots over the past three days, but today reversed off its highs to close near the lows of its intraday trading range and below the 10-day moving average. I tend to like this better on a pullback to the 20-dema, about a point lower.

Yelp (YELP) broke below its 10-dma today and is now testing its 20-dema down at 42.19. I’d see if we get a volume dry-up at the 20-dema as a possible lower-risk entry opportunity.

Social-Networking Names:

Twitter (TWTR) has acted very well since posting a series of pocket pivots last week. On Monday, it regained the 50-day moving average on a pocket pivot move which was buyable at that point. The stock has now been up six days in a row and is well above the 50-dma, so I’d look for a pullback closer to the 50-dma at 17.47 as a lower-risk entry.

Snap (SNAP) got hit with some selling after AAPL’s product announcement event when AAPL announced that it would be adding features to its iMessage app that are seen as competing with SNAP. I don’t know if that’s true or not, but it did send the stock down toward the 10-day moving average on heavy selling volume.

That may have just been some scared selling, and the key was to look for selling volume to dry up and dissipate on the pullback. That’s what happened today, even though SNAP closed down on the day. It did, however, hold support at the 10-dma with volume drying up to below average. This puts the stock in a better, lower-risk entry position here using the 10-dma as a tight selling guide, or the 20-dema or 50-dma as wider selling guides.

Solar Names:

First Solar (FSLR) is holding within what will become a seven-week base by the end of this week. So far, however, it hasn’t shown any desire to break out, and instead appears set to test its 50-day moving average. I’d watch for a test of the 50-dma as a possible entry opportunity, assuming selling volume dries up at that point.

SolarEdge Technologies (SEDG) looked like it was in trouble on Monday as it bee-lined for its 50-day moving average on heavy selling volume. But the next day the stock gapped up slightly at the open and jacked higher to post a big-volume supporting pocket pivot at the 50-dma. Talk about schizophrenic!

It held tight today very nicely right at the 10-dma and 20-dema confluence as volume declined to -25% below average. As long as it holds the moving average confluence it remains buyable here using the lower of the two line as a tight selling guide. A fascinating example of how buying when things have reached maximum ugliness is often feasible and ends up working. This assumes one has the courage to make the trade with the knowledge that the 50-day line serves as a tight selling guide. It’s doable, but psychologically difficult.

Video-Gaming Names:

Activision Blizzard (ATVI) is pulling back below its 10-dma on declining volume. I like it best on pullbacks to the 20-dema at 64.30.

Electronic Arts (EA) is tucking into its 10-dma and 20-dema on slightly above-average volume, which is the antithesis of what you’d like to see, namely volume drying up. This could be considered to be in a lower-risk entry position, however, with the idea of using the 20-dema at 118.65 as a tight selling guide.

Take-Two Interactive (TTWO) is pulling into its 10-dma on volume that was -48% below average. This comes on the heels of last Thursday’s continuation pocket pivot along the 10-dma. Therefore, it could be used as an add point for an existing position taken lower in the pattern while using the 10-dma as a selling guide for the additional portion. Otherwise I think TTWO is way too extended to constitute a strong initial entry situation.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

With the indexes pushing into or very near to all-time high price ground, things look quite rosy. The index action is confirmed by the constructive long set-ups I’m seeing in a large number of stocks, even after the strong move we’ve seen so far this week.

To this end, one must stick to placing your entry trades near areas of logical support without chasing strength. In this report, we can see several names that are in just such lower-risk entry positions, so those are actionable here, as I see it. The market, of course, is a bit extended so an index pullback from here is not out of the question.

Prior index breakouts during the summer of 2017 have met with instant failure and subsequent sharp breaks to the downside, so we must be on the lookout for the possibility that this occurs again. And, of course, my method of trading the UVXY can serve as a mind-soothing hedge against any such shenanigans. In addition, when it comes to handling individual stocks, the simple solution is to avoid chasing strength, and to keep your long entries at the lowest-risk spots possible, end of story.

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions though positions are subject to change at any time and without notice.